Convertible folly: Foreign debt carries costs that spill over to the economy as a whole

The ongoing efforts to rework the rules to give companies more leeway to repay foreign currency convertible bonds (FCCBs) bring to mind many homilies. Look before you leap. As you sow, so shall you reap. A stitch in time saves nine. Few companies cared to pay heed to such sane, if boring, advice when they issued FCCBs.

Policymakers, both in the government and the Reserve Bank of India, who should have known better, also preferred to turn a Nelson's eye to potential risks. Well, the risks have now materialised. FCCBs have turned into millstones round the necks of the companies that issued them.

Holders are no longer interested in converting them into shares at pre-determined prices that are much in excess of the prevailing market price. They want their money back. Many borrowers, however, are not in a position to redeem the debt. The problem, however, does not end there.

The reason is redemption of FCCBs calls for externalisation of rupee funds. So, even where companies have the necessary local funds to repay their foreign bonds, the country as a whole must also have the foreign exchange resources to pay out the proceeds. That was not an issue when our reserves were growing by leaps and bounds.

But when the current account deficit is perilously close to an unsustainable 4% of GDP and forex inflows have slowed dramatically, any large-scale outflow of funds on account of FCCB redemption is bound to rock an already tottering boat.

That is the crux of the problem. It is also why we as taxpayers have a vested interest in how the issue is resolved. Given our present predicament, we might not have any option but to renegotiate on terms that are bound to be unfavourable. However, all is not lost.

If we learn from our misadventure with FCCBs and keep strict tabs on external borrowings, especially short-term external commercial borrowings (ECBs), it might be a lesson welllearnt. Except that going by the recent spate of relaxations allowed for ECBs, including allowing airline companies to borrow overseas for working capital expenses, it would appear we are yet to learn our lesson.